The Broadbent Blog

Computers, jobs and rising inequality

Economists take a benign view of the impact of technological change on jobs, dismissing the "Luddite" view that technical progress can be a significant cause of unemployment. The core argument is that higher productivity (output per hour worked) drives increases in incomes so that demand rises, creating new jobs as old ones are destroyed.

That said, it has become the conventional wisdom that there are winners and losers from the new information based, digital technologies, and that these have been an important factor behind rising income inequality since the 1980s. “Skill biased technological change” is held to benefit the highly educated since technology generally complements cognitive skills, while it eliminates many less skilled jobs.

Erik Brynjolfsson and Andrew McAfee of MIT make a convincing argument in their 2014 best selling book, The Second Machine Age, that information technology (IT) will drive massive increases in productivity as advanced robotics, Artificial Intelligence, “the internet of things” and a host of new innovations enabled by exponential increases in computing power create a new bounty of wealth. But they warn that the gains will be spread very unequally.

IT complements skills and raises productivity and pay in jobs applying cognitive skills to challenging, non routine tasks. In a telling example, they note that, while even phone apps and not just supercomputers can now defeat grandmasters at chess, good chess players with the help of a laptop computer can beat even the most advanced supercomputer playing alone. Computers are not creative enough to write new software.

The jobs that will be displaced by machines perform routinized tasks, such as those of clerks and blue collar assembly line workers. But the progress of IT is displacing jobs higher and higher up the skills ladder. For example, affordable computer programs like TurboTax have eliminated routine work formerly done by accountants, and machines can already (albeit still imperfectly) translate languages and even drive cars.

IT has eliminated middle skilled jobs, and new jobs are being created at the high and the low end of the education and skills spectrum. At the same time, IT development has resulted in huge “winner take all” rewards for a handful of individuals who have pioneered major new applications which have been widely adopted – think Google and Facebook. Compared to the giants of the industrial age, these companies have huge market capitalizations but relatively few workers, and only have to invest modestly in physical capital.

The theory of skill biased technological change tells us a lot but has significant problems as an overall explanatory framework for rising income and wealth inequality. As has been frequently noted, inequality still varies a great deal between advanced industrial countries using the same technologies because institutions, such as unions and labour laws as well as government social and tax policies, make an important difference.

And, as Thomas Piketty showed in his own 2014 best-seller, the ranks of the very rich go far beyond internet billionaires to include those who have inherited wealth, as well as the very well-paid CEOs of “old economy” enterprises who have ruthlessly used IT to cut costs. Technological change may explain why the less skilled are doing badly, but there is a bigger story behind the rise of the super wealthy compared to the merely highly educated.

That said, the authors of the Second Machine Age and their colleague David Autor at MIT make a convincing case that new technology has very much worked against those without very high levels of skills. They make the key point that the elimination of routine jobs by machines results in the relatively unskilled competing for the many lower level jobs which are non routine and cannot be readily automated, such as personal care support workers, hairdressers, cooks and chefs, janitors, security guards and so on. The relative weight of these low productivity, low skill, low pay positions in the job market is increasing, and their pay is flat or falling.

Economists typically view more education as the solution to inequality brought about by skill biased technological change. But increasing the supply of more educated workers will not by itself increase the number of well-paid and highly skilled jobs in which IT is a complement rather than a substitute.

Instead, it may result in higher unemployment and even lower wages for those at the lower end of the skills ladder.

The authors of The Second Machine Age discuss, but do not go so far as to advocate, a basic income for all citizens. But it will be hard to refute the moral and economic logic for spreading the bounty of technological progress to the many if the wealth of the very rich increases as rapidly as the power of the marvellous machines that are now at their service.

Andrew Jackson is Adjunct Research Professor in the Institute of Political Economy at Carleton University, and senior policy adviser to the Broadbent Institute.

A version of this article originally appeared in the Globe and Mail's Economy Lab.